The Gold Reserve Act of 1934 nationalized all monetary gold in the United States. Only the Treasury could own gold and buy and sell gold. The act also limited the power of the president to reduce the gold weight equivalent of a dollar, and the day after the passage of the Gold Reserve Act President Roosevelt fixed the gold equivalent of the dollar at $35 per ounce of gold, where it remained until 1971.
The act also established a stabilization fund of $2 billion, put at the disposal of the secretary of the Treasury, to support the purchase and sale of foreign currencies as needed to stabilize the value of the dollar.
The groundwork for the enactment of the Gold Reserve Act began with the banking crisis in March 1933 that led President Roosevelt to suspend banking operations for four days. Before banks were reopened the government required that all commercial banks turn over to the Federal Reserve System all gold and gold certificates and furnish lists of all persons who had withdrawn gold or gold certificates since February 1. The Federal Reserve issued Federal Reserve Notes in exchange for gold and gold certificates. The export of gold and speculation in foreign exchange was banned and one month later individual ownership of gold and gold certificates was likewise banned. The Treasury purchased privately held gold in the United States at a price of $20.67 per ounce, the price that had prevailed with few fluctuations for 100 years. The value of the dollar on foreign exchange markets depreciated 15 percent when the U.S. dollar was no longer redeemable in gold.
The World Economic and Monetary Conference, held in London during June and July 1933, sought to forge an agreement for the stabilization of international currencies and the eventual return to an international gold standard. Even members of the United States delegation could not agree among themselves, and President Roosevelt undermined the conference by announcing that the United States would manage its monetary policy to meet the needs of its domestic economy rather than fulfill conditions set for international monetary cooperation.
Abandonment of the gold standard in the United States aroused fears of inflation, inspiring references to the French Revolution and post–World War I Germany. Nevertheless, there were voices of support. Winston Churchill, responding to the United States’ severance from the gold standard, called the action “noble and heroic sanity.” On 3 July 1933 John Maynard Keynes responded to Roosevelt’s announcement in an article (with the headline “President Roosevelt is magnificently right”), referring to the new law as a challenge to us to decide whether we propose to tread the old unfortunate ways, or to paths new to statesmen and to bankers but not new to thought. For they lead to the managed currency of the future” (Schlesinger, 1959).
Churchill later observed, perhaps overstating the case:
The Roosevelt adventure claims sympathy and admiration from all who are convinced that the fixing of a universal measure of value not based upon rarity or abundance of any commodity but conforming to the advancing powers of mankind, is the supreme achievement which at this time lies before the intellect of man.
The Treasury began, through the New Deal era Reconstruction Finance Corporation, to purchase gold domestically and later in international markets, driving up the price of gold in dollars, which effectively devalued the dollar in terms of gold. As the price of gold was rising Roosevelt fixed the price officially at $35 per ounce. The increase in the dollar price of gold substantially increased the value of the government’s gold holdings, creating a windfall profit for the government that supplied funds for the Treasury’s stabilization fund and later for the U.S. contribution to the World Bank and International Monetary Fund.
In the 1970s the United States government stopped selling gold to foreign central banks at $35 per ounce, ending the fixed exchange rate between dollars, gold, and foreign currencies. The price of gold was allowed to fluctuate freely, and the ban on the domestic ownership of gold was lifted.